Adjustable versus fixed rate loans

A fixed-rate loan features a fixed payment for the entire duration of your loan. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on these types of loans don't increase much.

When you first take out a fixed-rate mortgage loan, the majority your payment goes toward interest. As you pay , more of your payment is applied to principal.

You might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a good rate. Call 1st Credential Mortgage Inc at (281) 778-0805 to discuss how we can help.

There are many kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in a given period. Plus, almost all adjustable programs have a "lifetime cap" — the rate can't exceed the capped percentage.

ARMs most often feature their lowest, most attractive rates at the start of the loan. They usually guarantee the lower interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the initial lock expires.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on staying in the house for any longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at (281) 778-0805. We answer questions about different types of loans every day.

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